ORIE 3150 October 8 2009 lease notes

ORIE 3150 October 8 2009 lease notes - ORIE 3150 Leases A...

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ORIE 3150 Leases A lease is a contractual agreement between a lessor (owner) and a lessee (renter) that grants the right to use specific property for a period of time in return for cash payments. Leases are always contracts (legally enforceable items), but they can be one of two types. Operating Leases In an operating lease the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor. The lease (or rental) payments are recorded as an expense by the lessee and as revenue by the lessor. It’s just like renting something, you certainly don’t own the asset. Capital Leases A capital lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee. The lessee is required to record an asset and the related obligation at the present value of the future lease payments. The leased asset is reported on the balance sheet under plant assets. The portion of the lease liability to be paid in the next year is a current liability, and the remainder is classified as a long-term liability. Off Balance Sheet Financing Note that if I keep the lease as an operating lease, I keep it off of the balance sheet. That’s the objective, keep debt off of the balance sheet. So companies will work the system and keep leases to be barely operating. Airlines are famous for this. How does one decide? Operating or Capital Checklist 1. The lease transfers ownership to the lessee at the end of the lease term. 2. The lease contains a bargain purchase option 3. The lease term is equal to 75% or more of the estimated economic life of the asset 4. The present value of the lease payments amounts to 90% or more of the fair value of the lease property. If any one or more
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ORIE 3150 October 8 2009 lease notes - ORIE 3150 Leases A...

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